Financing Concerns Deepen for Asian Private Equity

HONG KONG (Reuters) – Private equity firms, already hit hard by the credit crunch’s impact on lenders, face an even tighter lending market for pending deals after the recent Wall Street shake-up.

Even in Asia, a hot economic region thought to be ripe for private equity deals, the Wall Street upheaval is having an effect.

Tighter lending conditions could either delay, re-price, or scupper any given auction in the $500 million to the $1 billion or above range that involves private equity suitors, Asian industry sources say.

The major blow to private equity borrowers came in the last two weeks when the list of major Wall Street lenders changed dramatically. Lehman Brothers filed for bankruptcy, Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz) bought Merrill Lynch (MER.N: Quote, Profile, Research, Stock Buzz), and both Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz) and Goldman Sachs (GS.N: Quote, Profile, Research, Stock Buzz) became bank holding companies.

Rob Morrison, the chairman of research and investment firm CLSA, said that with more write-downs expected from U.S. and European banks, it’s possible they will need to raise hundreds of billions more to shore up their balance sheets.

“If Western banks have to raise that sort of capital, they’re not out there lending,” Morrison told Reuters on Thursday on the sidelines of the Super Return conference.

Bain Capital Hong Kong-based managing director Jonathan Zhu also believes the current market turmoil could impact the financing and valuation of pending private equity deals.

“My suspicion is that it will. Exactly how, I’m not sure.”

Bain is among the firms bidding for the handset unit of China’s Huawei Technologies, a $3 billion-plus deal that involves at least two other private equity bidders.

“People are still working on it. It’s still on track,” said Zhu, on the sidelines of a private equity conference, when asked about the progress of the auction.

Bain is also among the firms bidding for PCCW’s new telecom unit, sources have said, a more than $2 billion auction that involves a half dozen private equity firms.

Shares of PCCW (0008.HK: Quote, Profile, Research, Stock Buzz) fell sharply last week in part on concerns the market turmoil would impact the sale.

Asia Pacific private equity deals are down 15 percent year to date, according to Thomson Reuters, on 491 deals worth $32.3 billion.

Local banks throughout Asia are actively lending, making smaller deals possible. But bigger deals will be tough to pull off, as private equity firms typically borrow around two-thirds of the money needed for a buyout.

And while falling stock markets globally have made companies cheaper to buy or invest in, the question investors face is how much lower are prices headed?

Private equity executives at the Super Return conference on Thursday said the market turmoil also left many investors questioning how long they would have to hold on to acquisitions if they do succeed.

“We’re not seeing a lot of signs that the public markets are going to come back. M&A activity is pretty light right now. How long are we going to own these assets?” Joncarlo Mark, a senior portfolio manager at U.S. pension fund CalPERS, asked the conference.

By Michael Flaherty
(Additional reporting by Jeffrey Hodgson; Editing by Lincoln Feast)